Labour Market Develops Positively Despite Weak Economic Growth

Business Cycle Tableaus by ZEW and Börsen-Zeitung

Tightening European Monetary Policy and Inflation Drive Long-Term Interest Rates

The inflation rates in the eurozone continue to rise while the GDP will decline.

Economic experts are forecasting a further increase in the inflation rate for the eurozone. There are also indicators of a positive development in the labour market and a gradual increase in the forecasts for short- and long-term interest rates. This is the result of the business cycle tableaus by ZEW Mannheim and the German daily newspaper, Börsen-Zeitung.

The negative effects on the economy caused by shortages in international supply chains and raw materials, restrictions in energy supply and ever faster rising prices are expected to persist throughout the next year. The latest set of forecasts for the eurozone indicates that real gross domestic product (GDP) will decline slightly this year, from previously 2.8 per cent to now 2.7 per cent. The median forecast for 2023 has fallen significantly to 2.3 per cent, compared to 2.6 per cent in the previous month.

Labour market development improves

The labour market situation is expected to improve further. The forecasts for the unemployment rate in the eurozone have been significantly lowered for 2022 and the following year. Growth is now expected to be 6.7 per cent in 2022 (previously: 7.0 per cent) and 6.4 per cent in 2023 (previously: 6.8 per cent). Although last month’s economic growth forecast for the upcoming years were now reduced, growth of more than 2 per cent would still be relatively good by historical standards and may lead to a further decrease in the unemployment rate. The further development of the German labour market is expected to be overwhelmingly positive. For 2022, the annual average (median) unemployment forecast is 5.0 per cent, and for 2023 it is 4.9 per cent. Both figures are slightly higher than in the previous month, yet hardly any forecast points to an increase in the unemployment rate from the current value of 5.1 per cent (March 2022). Instead, many of the experts can imagine an even more significant decline.

Inflation forecasts continue to rise for 2022

As inflation rates in the eurozone continue to rise, the inflation forecasts for 2022 and 2023 increase considerably. For 2022, the median forecast is 6.8 per cent, up from 6.1 per cent the previous month. Inflation forecasts for next year are also rising, from 2.4 per cent (previous month) to now 2.7 per cent. Still, experts expect a significant decline in 2023. For this forecast to come true, inflation rates would have to fall sharply by the end of the year at the latest.

Increase in forecasts for short- and long-term interest rates

In June 2022, positive developments are emerging for the labor market despite weak economic growth.

Following the European Central Bank’s (ECB) announcement to gradually end its ultra-loose monetary policy, forecasts for short-term interest rates are rising for the first time in years. For the current year, three-month interest rates are expected to rise (median) to 0.2 per cent and to 0.7 per cent in 2023. With a current three-month interest rate of minus 0.18 per cent, this equals an increase of 0.4 percentage points for 2022 and an increase of just under one percentage point for 2023. Long-term interest rates are expected to continue to rise. The high inflation rate and the tightening of European monetary policy act as driving forces. For the current year, experts forecast long-term interest rates of 1.2 per cent. In the previous month, the forecast was still 0.6 per cent, and 1.4 per cent is expected for next year. However, figures diverge considerably. The maximum forecast for the ten-year interest rate is 3.1 per cent in 2022 and 2023.

Business cycle tableaus by ZEW and Börsen-Zeitung

In cooperation with Börsen-Zeitung, ZEW has been publishing monthly business cycle tableaus for Germany and the eurozone with economic key figures and forecasts since 2013. Numerous banks and institutes publish reports on the current and prospective economic situation at different intervals. The information relevant for the tableau is filtered out of these publications to compute a median, minimum and maximum of the available forecasts for the current and subsequent year.

The monthly tableaus show current GDP forecasts, its main components, consumer prices, industrial production, unemployment rate, short- and long-term interest rates, and interest rate spreads. The focus of the tableaus lies on national business cycle reports, which are complemented with forecasts from international banks and institutes. The tableau for the eurozone is enhanced by data from European banks and institutes.